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MSE News: Finally! Government to cap costs of payday loans

edited 30 November -1 at 1:00AM in Loans
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Former_MSE_HelenFormer_MSE_Helen
2.4K posts
edited 30 November -1 at 1:00AM in Loans
"George Osborne has today announced a cap on the costs of controversial payday loans..."
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Finally! Government to cap costs of payday loans

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  • It'll be interesting to see the effect. I'd imagine that one response by the lenders will be to drop the shorter-dated loans, as these give the most distorted APRs. 1% per day for a week gives 3,400%, 1% per day for a month gives 2,500%, and 1% a day for three months gives 1,400%.

    It'll also probably see a tightening of lending criteria, so fewer people wil be able to access the products. It's not clear if this is a good thing or not, as we don't know how many will respond by managing their money better, and how many will turn to loan sharks or crime.
  • fermifermi Forumite
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    And this is the FCA's already stated opinion on caps.

    http://www.fca.org.uk/static/documents/consultation-papers/cp13-10.pdf

    Alternative options

    Price cap on the total cost of credit – The benefits of a total cost of credit cap has been
    looked at by the Personal Finance Research Centre at the University of Bristol. This report
    highlighted that 17 EU member states have some form of price restriction. Their research was
    ambiguous, on the one hand suggesting possible improved lending criteria and risk assessments.
    On the other, prices may drift towards a cap, which could lead to prices increasing or lead to
    a significant reduction in lenders exercising forbearance.55 Neither of these outcomes latter
    would be beneficial for consumers. Clearly this is a very intrusive proposition and to ensure we
    fully understand the implications we have committed to undertake further research once we
    begin regulating credit firms and therefore have access to regulatory data.

    Cap on loan amount – Some American states have taken further steps to address inadequate
    affordability assessments by setting caps on the maximum loan amount, either as a total
    (e.g. $500) or as a proportion of income (e.g. 25% of income). However, the level of limits
    chosen in these states has been criticised by the US consumer group the Centre for Responsible
    Lending.56 This is because limits do not take into consideration the borrower’s other obligations
    and expenses.
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  • SparhawkeSparhawke Forumite
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    I am always dubious on these caps, especially as it doesn't look like anything will be done about them rampaging through our streets at will.

    If the government does cap them, everyone knows that they will basically charge everyone the absolute highest they can, and shorten the payment length and we will be in no better position than before.

    Fermi or Helen, if you read this you can close the other topic I made, 20 minutes before this one opened :p
    "Don't blink. Blink and you're dead. They are fast. Faster than you can believe. Don't turn your back. Don't look away. And don't blink. Good Luck" - The Doctor.
  • Pay-day loan companies did not come out of nowhere. In the late 1990's Brown/ Blair made changes to the Consumer Credit Act, which up until then had held very high interest rates unlawful. This paved the way for this type of business to be started.

    We don't need a new law to cap interest rates, we just need the old wording of the Consumer Credit Act to be reinstated.
  • If pay-day lenders are such rip-off merchants with sky-high margins, why haven't there been a flood of new companies offering lower rates and undercutting them?

    Whether you like it or not, pay-day lenders do serve a purpose. Restricting the rates (and therefore the risk the companies are prepared to take) will just drive people who now can't get the loans into the hands of loan sharks who of course have no regulations.

    If there were more regulations in regards to making sure everyone who takes out a loan is given information on where to go to get help if you are in debt troubles, I could agree with that.
  • RafterRafter Forumite
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    At last - a cap as suggested with a maximum 20% up front fee then 4% a month seems to ensure that you don't pay back more than twice what you borrowed over a 12 month period which seems like a sensible 'maximum' for any consumer credit product.

    It needs to be 'fair' to both consumers and different types of lenders though.

    1) Bank overdrafts (authorised or unauthorised) need to be similarly capped so if you go overdrawn by £10 for a month the maximum you could be charged would be 24% (20% + 4%) so £2.40 instead of the £1 per day or £30 fee plus interest that is currently applied.

    2) The bill also needs to include a recommended penalty charge cap and confirm that irregular charges or penalties for breaching the terms of your account need to reflect the cost as required under contract law. I'd suggest a maximum of £5.

    3) The 20% up front fee needs to be capped at £25 maximum and a maximum of say £120 per year with the same lender to prevent someone paying multiple up front fees to the same lender for revolving short term credit.

    4) A 'future conduct risk' clause needs to be included so that any other creative charges or fees banks of payday lenders come up with to circumvent these rules are ringfenced while the FCA and courts investigate their legality and compliance with the spirit of legislation. The ringfenced fees would then be refunded in full to customers if found to be simply profiteering or rule avoidance rather than genuinely of value to competition and consumer choice.
    Smile :), it makes people wonder what you have been up to.
  • Rafter wrote: »
    1) Bank overdrafts (authorised or unauthorised) need to be similarly capped so if you go overdrawn by £10 for a month the maximum you could be charged would be 24% (20% + 4%) so £2.40 instead of the £1 per day or £30 fee plus interest that is currently applied.

    I susppect, if this was introduced, that you'd rapidly see banks simply refusing to allow any payments that resulted in an unauthorised overdraft, followed by accounts being closed.

    This may not be popular with the people whose gas bills, loan payments, or council tax were previously being paid through this route.
  • RafterRafter Forumite
    3.8K posts
    john1993 wrote: »
    I susppect, if this was introduced, that you'd rapidly see banks simply refusing to allow any payments that resulted in an unauthorised overdraft, followed by accounts being closed.

    This may not be popular with the people whose gas bills, loan payments, or council tax were previously being paid through this route.

    John,

    Accept your point but just trying to be 'fair'. Why should a payday lender be 'capped' but a bank is allowed to charge a lot more for the equivalent loan.

    I have no problem with charges for unathorised overdrafts but they have to be proportionate to the cost and risk taken by the bank. Otherwise they are simply used to subsidise other customers.

    In the examples you give you are suggesting bills of £100's which would result in much higher fees than my illustrations if the cap was 20% of the unauthorised overdraft amount.

    It should never be 'cheaper' for a customer to use a payday loan than their own bank as a result of regulation - which is partly why the payday loan industry has grown so big. If banks charged more realistically, provided a more convenient service then no payday lender would be able to compete.

    R.
    Smile :), it makes people wonder what you have been up to.
  • N1AKN1AK Forumite
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    Rafter wrote: »
    1) Bank overdrafts (authorised or unauthorised) need to be similarly capped so if you go overdrawn by £10 for a month the maximum you could be charged would be 24% (20% + 4%) so £2.40 instead of the £1 per day or £30 fee plus interest that is currently applied.

    No problem. The bank will either charge you a fee for having an account with a nice low overdraft fee or not give you an overdraft. Stop banks from charging enough for unauthorised overdrafts and they'll just refuse to make payments that would take you into it; you can then deal with a pee'd off company who you won't pay.

    The problem with all these suggestions. Including the current payday cap being proposed is that they are pie in the sky ideas. Do you have any idea what the default rate, admin costs etc of running a payday lender are and if not then what makes suggesting a £25 cap any more insightful than proposing that every payday borrower gets a free Porsche thrown in with the loan ;)

    Put caps on lending and:
    1. They'll move costs somewhere else if possible
    2. If they can't then they'll restrict lending
    3. The people who can no longer borrow can then...

    The payday lender market may well be full of parasites but it's a competitive market of parasites. If reasonable profits could be made lending to the same people with lower costs then the market would be driving costs down.
    Having a signature removed for mentioning the removal of a previous signature. Blackwhite bellyfeel double plus good...
  • Rafter wrote: »
    John,

    Accept your point but just trying to be 'fair'. Why should a payday lender be 'capped' but a bank is allowed to charge a lot more for the equivalent loan.

    They probably shouldn't be, but if capps are broughht in I expect that in both cases (payday lenders and overdrafts) that there will be a slew of customers who are not happy with the outcome.

    I suspect that there's a belief out there on the streets that capping the rates / overdraft charges means that the service will still be available, just cheaper, which may well not be the case.
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